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Franc Falls, Extends Two-Week Drop, on Rate Target Speculation

Switzerland’s franc weakened against most of its major counterparts amid speculation the central bank will take further steps to weaken the currency.

The franc extended two weeks of losses against the dollar and fell the most against New Zealand’s currency and Swedish krona. The cabinet expects the Swiss National Bank to set an exchange-rate target of at least 1.2 francs per euro, SonntagsZeitung reported, without saying where it got the information. An “energetic” approach is needed to curb the rise of the franc, Swiss President Micheline Calmy-Rey said.

“The risk of further measures should keep Swiss franc bulls wary at these levels,” said Mansoor Mohi-uddin, global head of currency strategy in Singapore at UBS AG, the world’s third-largest currency trader.

The franc depreciated to 78.64 centimes per dollar at 4:32 p.m. in London from 78.51 centimes last week. It fell to 1.1311 from 1.1303, and dropped to 1.2942 per pound from 1.2924.

The currency has strengthened 14 percent this year, the best performer among a basket of foreign exchange from 10 developed markets according to Bloomberg Correlation-Weighted Currency Indexes.

The franc’s strength, which is making Swiss products more expensive abroad, prompted the central bank to assess “the whole range of options” to prevent its gain after it rose to a record against the euro this month.

‘Clearly Overvalued’

The government supports the “expansive monetary policy” being pursued by the Swiss central bank, Calmy-Rey said in a speech today in Lucerne, Switzerland. The cabinet also sees the Swiss franc as “clearly overvalued,” she said.

The SNB earlier this month cut borrowing costs to zero and increased the amount of money that banks can convert immediately to cash almost sevenfold. Policy makers also left the door open for additional measures to stem the franc’s record-breaking rally. Governing board member Thomas Jordan said Aug. 11 the central bank was assessing several options to prevent the franc from appreciating.

The franc remains 39 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development.

The SNB is unlikely to intervene to weaken the franc in the market, or to set an exchange rate of the currency to the euro, said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London.

‘Keep Talking’

“I don’t expect the SNB to come in an intervene, but I expect them to keep talking because that seems to be working quite nicely for them,” Kendrick told Francine Lacqua on Bloomberg Television’s “On the Move” program. “The talk of fixing the exchange rate also looks somewhat premature at this point. The SNB will continue to do what they are doing and that’s to make the franc expensive to hold.”

Swiss bonds declined for a second day as stock gains damped demand for the safest assets.

The 10-year yield rose five basis points to 0.96 percent, after falling to 0.85 percent last week, the lowest since Bloomberg began collecting data on the securities in 1994. The two-year yield climbed three basis points to to 0.03 percent, after falling into a negative territory in the past three days.

The spread between yields on two- and 10-year notes widened one basis point to 93 basis points, within two basis points of the narrowest since September, as investors favor longer maturities on speculation the strong franc will damp growth. The 12-month average is 121 basis points.

Swiss government bonds handed investors a 6.4 percent return this year, beating a 5.9 percent gain from German bonds, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg.

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